WEALTH HEALTH: New report shows necessity for extra checks on brokers

Sunday

Many victims of financial frauds and bad brokers could avoid trouble by doing a simple background check before giving money to the bad guys.

So imagine how alarming it is to note that the primary way that consumers check out brokers is flawed.

That was the message sent recently when the Public Investors Arbitration Bar Association (PIABA) issued a report about the BrokerCheck service maintained by the Financial Industry Regulatory Authority (FINRA).

BrokerCheck is a free online database that gives investors access to background information on brokers and firms that are now or that have been registered with FINRA. It includes current licensing status and history, employment history and any regulatory issues, customer disputes criminal complaints and other matters that help investors decide if a broker is a good risk.

FINRA started making records available online in the late 1990s, but created BrokerCheck in 2007. In 2009, more than 20 million searched were conducted on the site, with roughly 18.5 million summary records viewed and nearly 4 million requests for detailed reports.

FINRA’s site (finra.org) says that the BrokerCheck service “should be the first resource investors turn to when choosing whether to do business or continue to do business with a particular firm or individual.”

Having written two books on choosing and working with financial advisers, I’m a big believer in the BrokerCheck service. It’s far from perfect – no system is – but it’s the easiest access the average consumer is going to get, and far too many individuals hire advisers without doing the most cursory of background reviews.

Finding consumers who have done background checks on advisers before they hired them is rare enough, but the one constant I have found from people who have done the proper diligence is that they are the ones who are happy with their adviser. All too often, they come to the good relationship with their adviser – and the savvy to do a background check – having first had a false start or a bad experience with someone they did not check out thoroughly.

And being thorough is the issue here.

The key issues from the PIABA report include that personal bankruptcies and reasons for termination from past jobs are not included in BrokerCheck, but are available from state regulators. Similarly, PIABA noted that information about a broker being under internal reviews for fraud or other wrongdoing, facing tax liens in excess of $100,000 is available from the states, as is information on failed tests for industry qualification exams.

Jason Doss, president of PIABA and co-author of the report, said that “the information should all be available, as it is from the states. … You are better off doing a search with the state securities administrator than through BrokerCheck.”

FINRA, in a response to the report, noted that some of the issues are more semantic than real, pointing out that reasons for termination are included in BrokerCheck if the broker resigned or was fired for fraud, theft, failure to supervise or for violating investment-related laws. Outside of those conditions, the reasons for termination are excluded.

The test scores issue, likewise, is not a big red flag. Plenty of lawyers fail the bar before passing it, many financial advisers need to take their exams more than once.

One area that is more concerning is the elimination of bankruptcies more than 10 years old, which FINRA notes is consistent with SEC and state-approved registration forms, and liens that have been satisfied.

While plenty of people in the business world have gone through bankruptcy, clients have a right to know this information and ask about it.

The bigger issue here for consumers is that, as things stand right now, the disconnect between what an investor can get from FINRA and the states forces consumers to check in both places to be comfortable. FINRA supports this too, routinely encouraging the users of BrokerCheck to follow links to “learn as much as possible” about the investment professionals they are working with or thinking of hiring. (FINRA’s link to state regulators.)

Chuck Jaffe is senior columnist for MarketWatch. He can be reached at cjaffe@marketwatch.com. CLICK to read more of his columns.
The issue is that most consumers barely do a single background check, and following up to do the second – particularly if everything looks okay in the preliminary report – just isn’t realistic.

Ultimately, if this is about consumer protection, the advisory and regulatory communities have to take the next step and make it so that all state databases are readily accessible, and so that the BrokerCheck site gives either gives consumers the maximum information or winds up allowing consumers to directly check both the FINRA and all applicable state databases with the touch of a button.

That shouldn’t be hard.

Yes, investors can do it by taking extra precautions and making a few extra clicks, but the truth is they shouldn’t have to.

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